How to Buy 43 "Off Limits" Chinese Dividend Stocks

Carla Pasternak's picture

Wednesday, September 16, 2009 - 11:09am

by Carla Pasternak

Chinese stocks have soared this year on the wave of upbeat news coming out of the country, which has also boosted the benchmark Shanghai Composite Index by +48.3% since the start of the year. That's more than three times the +15% rise for the S&P 500.

After such a huge run up, the index may be ready for a breather. And a short-term pullback may provide just the entry opportunity long-term income investors have been waiting for.

But there's one not-so-small problem...

Foreign investors like you and me can't invest in most of the companies listed on either of mainland China's two main stock exchanges -- the Shanghai or the Shenzhen. Only domestic Chinese investors and some select foreign institutions can.

However, there is a loophole whereby foreign investors can access the normally "off limits" market and 43 of its most steady dividend payers.

"H" Shares for Mainland China Dividend Payers
The key to capturing yields from China lies with an island only one-third the size of Rhode Island: Hong Kong. Unlike the Shanghai and Shenzhen, the Hong Kong Exchange is open to foreigners. Moreover, a class of so-called "H" shares that trade on this exchange give foreign and U.S. investors access to mainland Chinese companies.

"H" shares are shares of a company incorporated in the Chinese mainland but listed on the Hong Kong Exchange. Many of these companies also trade as "A" shares on Shanghai or Shenzhen, which are off limits to foreigners, so the "H" shares are one way you can play the mainland.
If steady income is what you're after, some of these "H" shares are likely your cup of tea. The Hang Seng China Enterprises Index, or H-Share Index, includes some of mainland China's biggest banks, oil companies, and telecom providers that churn out steady cash flow and dividend payouts. These names include Industrial and Commercial Bank of China, PetroChina, and China Life Insurance -- about 43 companies in all.

Like all shares that trade on the Hong Kong Exchange, "H" shares trade in Hong Kong dollars. You can trade "H" shares directly on the Hong Kong exchange if you open an international account with a broker with an international desk. Interactive Brokers and E-Trade are two brokers that offer international trading desks for easy access to Hong Kong markets.

How to Invest Directly in China Without an International Account
Some of these 43 companies also trade as American depository receipts (ADRs) on the Big Board.

But if you limit yourself to a major U.S. stock exchange, you'll miss out on some of the leading players in China's growth story -- companies like Industrial and Commercial Bank of China (ICBC) (Hong Kong: 1398), one of the world's largest banks by market cap.

Conversely, there are a number of U.S.-traded funds that buy the "H" shares directly, so you get the best of both worlds. I brought one of these funds to the attention of my High-Yield International readers last month when it yielded 11.9%. (I understand many investors have some apprehension about buying stocks on foreign exchanges, so whenever possible I do my best to offer international high-yield ideas that also trade in the U.S.)

So while the companies may offer strong cash flow and steady dividends, you have to pick shares at opportune times to capture high yields.

After the massive Chinese market rise, a near-term pullback is just the chance long-term investors have been waiting for to lock in this and a dozen more high-yielding China plays we showcase in High-Yield International.

Carla Pasternak does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.